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A quantitative reassessment of the purchasing power parity hypothesis: Evidence from Norway and the United Kingdom
Author(s) -
Edison Hali J.,
Klovland Jan Tore
Publication year - 1987
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.3950020404
Subject(s) - purchasing power parity , relative purchasing power parity , economics , econometrics , proportionality (law) , exchange rate , productivity , macroeconomics , political science , law
Annual data from Norway and the United Kingdom from 1874 to 1971 are used to reassess the empirical performance of the purchasing power parity (PPP) doctrine. The simple version of the PPP relationship is supported by the data only if different short‐run dynamics during a floating‐rate period 1914–1928 is allowed for. Two sets of factors were found to be important in amending the simple PPP model. These were short‐run cyclical variables affecting the adjustment towards the PPP equilibrium relationship and long‐run structural factors such as productivity and terms of trade. Within this expanded model the proportionality between the exchange rate and relative price levels could not be rejected.